Avoiding Common Mistakes in Trading Weekly Options

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Options with weekly expirations offer a huge improvement to the learning process for new option traders. You can increase your screen time very rapidly and see how just seven days’ difference might change how two positions react to a move in the markets.

When weekly options were first introduced they quickly became a favorite vehicle to trade for many options traders.  Ironically, prior to the popularity of weekly options, most options trading books, coaches, mentors, webcasts—you  name it—would warn options traders to make sure they were outof their option positions the week before options expiration.

Why did they say this?

Because options trading 101 tells us expiration week is when big risk comes into play due to high gamma, which in basic terms means the price of the option will move very quickly for or against you with the movement of the stock. Sometimes there isn’t enough premium left in the options to justify the increased risk during the week of expiration.

Many traders have been burned trying to get those last few pennies from their short option positions, only to lose everything with an unexpected move in the underlying. A quick reminder: if you are short the option you are an option seller who collected the premium.

So what changed? If everyone is supposed to be out during expiration week, why are so many folks trading weekly options? One reason is that weekly options can act as a convenient hedging vehicle.

Prior to the introduction of weekly options, if you wanted to hedge a position due to event risk, like a Fed announcement or the monthly jobs report, you were forced to use the monthly options and pay a premium for the days remaining to expiration for that option. Now it is much easier and cheaper to deal with hedging for event risk using weekly options.

As these options became more popular with increased demand  can come increased prices, making some net short options trades look great especially during times when markets are range bound.

When selling options, the premiums can disappear very quickly, over a few days and the weekend, allowing you to enter a trade on Thursday and exit Monday or Tuesday of the following week. But make no mistake: the initial risk is still present.

You must monitor your options trades intraday to ensure the market doesn’t move quickly against you. Weekly options are not trades for the faint of heart, contain a great deal of risk, and must be monitored frequently, unlike what may be the case when trading slower moving monthly options.

More recently, another world of possibilities opened up when the weekly options series changed from one series opening each week on the Thursday nine days before it expires, to one series being introduced each week which expires five weeks hence (except where such an expiration is satisfied by the normal monthly cycle).

If you think about it this means that you have five options series to choose from at any point time. The two biggest advantages are:

1) You can really zero in and fine tune the amount of days to expiration you want to trade an options strategy

2) You can now practice options trading putting on new positions every week with the same days to expiration instead of trading just once a month (as long as the strategy requires 35 days or less).

So if you haven’t tried them yet, check out the weekly options! See how they might offer some new opportunities to you and provide a great way to learn new strategies very quickly.

Seth Freudberg and Michael Schwartz

no relevant positions

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